In: Accounting
Cornerstone Exercise 17.4 (Algorithmic)
Sell at Split-Off or Process Further Decision, Alternatives,
Relevant Costs
Betram Chemicals Company processes a number of chemical compounds used in producing industrial cleaning products. One compound is decomposed into two chemicals: anderine and dofinol. The cost of processing one batch of compound is $73,500, and the result is 5,600 gallons of anderine and 8,200 gallons of dofinol. Betram Chemicals can sell the anderine at split-off for $12.00 per gallon and the dofinol for $6.70 per gallon. Alternatively, the anderine can be processed further at a cost of $8.70 per gallon (of anderine) into cermine. It takes 2 gallons of anderine for every gallon of cermine. A gallon of cermine sells for $63.
Required:
2. What if the production of anderine into cermine required additional purchasing and quality inspection activity? Every 530 gallons of anderine that undergo further processing require 17 more purchase orders at $11 each and 18 more quality inspection hours at $26 each. Which alternative would be better and by how much? Do NOT round interim calculations and, if required, round your answer to the nearest cent.
Computation of Profit at Split Off Point | ||
Particular | Anderine | Dofinol |
Sale value at split off point | $67,200 | $54,940 |
(5600*12) | (8200*6.70) | |
Less:Allocation of Joint Cost ( in Ratio of 67200:54940) | $40,439 | $33,061 |
(73500*67200/(67200+54940) | (73500*54940/(67200+54940) | |
Profit at split off point | $26,761 | $21,879 |
Computation profit , in case of Anderine Further Proceesed | |
Particular | Amount |
Gallon Cermine Produced (5600/2 Gallon) | 2800 |
selling price per Ceramine gallon | 63 |
Total sales revenue from Ceramine ( 2800*63) (a) | $176,400 |
Less : Cost of Further Processsing | |
Cost of processing (5600*8.70) | $48,720 |
Cost of Purchase orders (5600/530X 17X11) | $1,976 |
(6000/500*20*$10) | |
Cost Quality inspection (5600/530*18*26) | $4,945 |
(6000/500*15*$25) | |
Cost of processing anderine | $40,439 |
Total Cost of Processing (b) | $96,080 |
Profit after further processing (a-b) | $80,320 |
Second Alternatie to sell after further processing of anderine is better |